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2.4 Long-duration contracts – classification and measurement
Publication date: 30 Nov 2021 (updated 31 May 2022)
us Insurance guide
A long-duration contract is one that is not subject to unilateral changes in its provisions and requires the performance of various functions and services (including insurance protection) for an extended period. Examples include contracts that are noncancelable or guaranteed renewable by the insurer, such as most life insurance and annuity contracts.
Long-duration contracts are further classified into several broad categories based on the product terms. These categories dictate the accounting model to be followed for revenue and cost recognition. These categories are discussed in the sections that follow.
Figure IG 2-1 provides a framework for determining the accounting classification for long-duration contracts.
Figure IG 2-1
Classification of long-duration life insurance contracts
Classification of long-duration life insurance contracts
Figure IG 2-1 Part 1
Figure IG 2-1 Part 2
Figure IG 2-1 Part 3
2.4.1 Traditional long-duration insurance – classification and measurement
These contracts provide a specified, fixed amount of insurance benefit in exchange for a fixed premium, either upfront, for a fixed number of payments, or payable each year the policy is kept in force. Examples include whole-life insurance, guaranteed renewable term-life insurance and long-term disability insurance. See IG 5.2 for measurement guidance relating to traditional long-duration insurance contracts.
Under the traditional long-duration accounting model:
- Premium revenue is recognized when due.
- A liability for future policyholder benefits is recorded as the present value of estimated future policy benefits and related expenses less the present value of estimated future net premiums. As a result, expected insurance benefits (i.e., estimated future death, disability, or other claims and any surrender benefits) are accrued over the life of the contract in proportion to premium revenue recognized. This method is referred to as the “net premium ratio” approach.
- Eligible deferred acquisition costs are capitalized and amortized to expense each period on a straight-line basis over the expected term of the related contract (see IG 3).
- All assumptions (except for the expense assumptions) utilized in the “net premium ratio” approach, including mortality, morbidity, and terminations, are required to be reviewed (and updated as necessary) on an annual basis or more frequently if evidence suggests that assumptions should be revised. The updated cash flows used in the calculation are discounted using the discount rate or curve on the original contract issue date (the locked in discount rate). The revised net premium ratio is used to measure benefit expense based on recognized premium revenue in the period. The difference between the updated opening period and previous ending period liabilities due to updating the net premium ratio is presented as a remeasurement gain or loss (cumulative catch-up adjustment) in current earnings.
- A remeasurement of the liability is also required using a current discount rate. The difference between the ending period liability measured using the discount rate on the original contract issue date and the liability measured using the current rate is recorded in accumulated other comprehensive income.
- All premium and claim cash flows are classified as operating cash flows in the statement of cash flows.
2.4.2 Traditional limited-payment – classification and measurement
Traditional long-duration limited-payment contracts provide a specified, fixed amount of insurance benefit that extends beyond the period or periods in which premiums are collected. Fees assessed are also fixed or guaranteed. Examples include single pay life insurance and a life-contingent payout annuity. A life contingent payout annuity promises to pay a stream of fixed or variable periodic payments for the life of the insured (annuitant) that ends upon the death of the annuitant. See IG 5.2 long duration contract liabilities for measurement guidance related to limited-payment contracts.
- Under the traditional “limited pay” accounting model, premium revenue is recognized when due. Gross premium received in excess of the net premium is deferred (sometimes referred to as a “deferred profit liability” or “DPL” and amortized in relation to the discounted amount of insurance in force (for life insurance) or expected future benefit payments (for annuity contracts).
- Expected insurance benefits are accrued as a liability for future policyholder benefits.
- Eligible deferred acquisition costs are capitalized and amortized to expense each period on a straight-line basis over the expected term of the related contract.
- All premium and claim cash flows are classified as operating cash flows in the statement of cash flows.
2.4.3 Universal life-type contracts – classification and measurement
Universal life-type contracts have charges or provide benefits that are not fixed and guaranteed. ASC 944-20-15-26 describes universal life-type contracts.
For purposes of the scope application of the Long-Duration Subsections of this Subtopic, universal life-type contracts include contracts that provide either death or annuity benefits and are characterized by any of the following features:
- One or more of the amounts assessed by the insurer against the policyholder, including amounts assessed for mortality coverage, contract administration, initiation, or surrender, are not fixed and guaranteed by the terms of the contract.
- Amounts that accrue to the benefit of the policyholder, including interest accrued to policyholder balances, are not fixed and guaranteed by the terms of the contract.
- Premiums may be varied by the policyholder within contract limits and without consent of the insurer.
If the mortality or morbidity risks are other than nominal, the fees assessed for insurance benefits and the amounts that accrue to the policyholder are not fixed and guaranteed, and the premiums vary within contract limits and without the consent of the insurer, then the contract should be classified as a long-duration universal life-type contract.
According to ASC 944-20-15-12, contracts providing insurance benefits other than death or annuity benefits, such as disability benefits, but that meet one of the three criteria in ASC 944-20-15-26, should also be accounted for under the universal life-type model. In addition, ASC 944-20-15-27 through ASC 944-20-15-30 note that certain types of contracts that in form are “participating contracts” may be considered universal-life type contracts.
A principal component of most universal life-type contracts is an account balance on which interest is credited to policyholders and from which assessments are deducted for mortality (or other insurance) risk and contract administration. In the absence of a stated account balance or a similar explicit or implicit contract value, the cash surrender value measured as of the balance sheet date should be accrued. However, in the event it is determined that only the cash surrender value should be accrued, it may be appropriate to reconsider the product classification. Generally, a significant and flexible investment component is incorporated into each universal life-type product, and it is unlikely that a universal life-type policy could function without maintaining at least an implicit account balance.
Under the universal life-type accounting model:
- Revenue consists of mortality (or other insurance) fees and contract administration assessments and is recognized when due. Premiums are considered deposits and not recognized as revenue.
- Fees and assessments collected in advance of the service rendered are deferred and recognized over the periods benefited.
- The account balance is recognized as a liability. The liability is updated each period for fee and assessment deductions and increased for interest or returns credited to the account balance. Persistency bonuses are accrued as a liability over the period preceding the bonus crediting.
- Insurance benefits (e.g., death or surrender benefits) in excess of the account balance are generally recognized as expenses in the period incurred unless the design of the product is such that future charges are insufficient to cover the benefits, in which case an additional liability is accrued over the life of the contract.
- Eligible deferred acquisition costs are capitalized and amortized to expense each period on a straight-line basis over the expected term of the related contracts.
- Premiums deposited and withdrawals are classified as financing cash flows in the statement of cash flows. There is diversity in practice in how interest credited is presented in the statement of cash flows; it may be presented as either operating or financing. Excess payments upon death are treated as operating cash outflows.
These contracts sometimes include market risk benefits and embedded derivatives that require bifurcation and fair value accounting either under ASC 944 or under ASC 815, respectively, as described more fully in IG 5.6 and IG 5.7. Guidance related to accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts is provided in the universal life-type contracts and nontraditional contract benefits subsections of ASC 944-40-25 (see IG 5.8).
2.4.4 Variable contracts – classification
Variable contracts with significant insurance risk are considered universal life contracts under ASC 944 and use the accounting model described in IG 2.4.3. The contract holder’s payments (deposits) are credited to a policyholder account balance. The contract holder directs the allocation of the account value among various investment alternatives which can include separate or general account options. The policyholder account balance is credited with the results of the investment return on their selected investment allocations, which depending on the selection may be positive or negative as the amount of investment risk the policyholder bears varies with the allocation chosen. The contract may be surrendered for the current account balance (typically less a surrender charge). After a specified period of time, the policyholder may elect to apply the account balance to purchase a payout annuity, which is treated as a separate contract at the annuity purchase date.
For most of the investment options offered in a variable contract, in order to hedge and keep track of the investment returns owed to the policyholder, the insurance company invests in investment alternatives selected by the policyholder using a separate account structure. A separate account is a separate investment account established and maintained within an insurance entity under specific state insurance laws and regulations. Its assets are recorded as “separate account assets” in an insurer’s balance sheet as they are owned by the insurance company.
2.4.4.1 Insurance company separate account – classification
Separate accounts are generally established by life insurance companies to fund individual and group contracts. A separate account is an investment account established and maintained by an insurance entity under relevant state insurance law to which funds have been allocated for certain contracts of the insurance entity, typically at the direction of the contract holder. The insurance company will usually establish several separate accounts, each of which can have different investment objectives. Separate accounts are similar to mutual funds, however, unlike mutual funds, the separate account assets are legally owned by the insurance company. Consequently, the separate account assets are recorded on the balance sheet of the insurance company.
Separate accounts have to meet the specified criteria in ASC 944-80-25-2 in order to apply the separate account model as described in ASC 944-80-25-3. These criteria include being insulated legally from the insurer’s general account liabilities and passing all investment performance through to the contact holder. If these criteria are met, the separate account model can be applied, which includes the following:
- Separate account assets are measured at fair value through income and reported as a summary total, with an equivalent summary total reported for separate account liabilities.
- Related investment performance and the corresponding amounts credited to the contract holder are offset in the same line in the statement of operations, netting to zero.
Insurance entities should not combine separate account and general account interests in the same investment when assessing consolidation of that investment, unless the separate account interests are held for the benefit of a related party policyholder as described in ASC 944-80-25-3f. In addition, specialized investment company accounting regarding consolidation should be applied to the separate account. Therefore, an insurer is not required to consolidate an investment in which a separate account holds a controlling financial interest if the investment is not or would not be consolidated in the standalone financial statements of the separate account.
ASC 944-80-25 also provides guidance on accounting for the portion of the separate account not allocated to contract holders, which is often referred to as “seed money.” The guidance requires that the proportionate interest in the separate account be accounted for in a manner consistent with similar assets held by the general account (i.e., by “looking through” the separate account to the underlying assets). If the interest in the separate account is less than 20%, and the underlying investments of the separate account meet the definition of securities under ASC 320-10 or ASC 321-10, the portion of the separate account value may be reported as an investment in equity securities.
Insurance companies prepare and issue standalone GAAP separate account financial statements which are subject to the guidance applicable to investment companies in ASC 946. See the AICPA Audit and Accounting Guide for Investment Companies for guidance. Key elements of these financial statements include disclosure of the individual invested assets held at year end, and investment performance for the year measured in terms of the change in contract holder unit values. Some separate account financial statements may include a significant amount of investments that are not publicly traded and have no readily determinable current market value.
2.4.4.2 Variable contracts with guarantees – classification
Many variable contracts have been enhanced to offer protection against the downside risk borne by contract holders from the selected investment alternatives. The amount of protection provided and the triggers for payment of the additional “guaranteed minimum benefit” (GMXB) vary and may be offered in different combinations.
Some GMXBs may provide that the policyholder benefits will not be less than the amount of deposits less withdrawals. Other GMXBs provide for a specified rate of return on that amount (often referred to as a “roll up”). Still others provide that the amount will be equal to a specified anniversary date value (often referred to as a “reset”) or the highest anniversary value (often referred to as a “ratchet”).
GMXBs may be paid to contract holders or their beneficiaries based upon different events:
- Guaranteed minimum death benefit (GMDB): provides the beneficiary a guaranteed minimum amount upon the death of the contract holder, regardless of the available account balance
- Guaranteed minimum income benefit (GMIB): provides the contract holder a guaranteed minimum amount available to annuitize, regardless of the available account balance
- Guaranteed minimum accumulation benefit (GMAB): provides the contract holder a guaranteed minimum amount of account balance at the end of a specified period, regardless of the available account balance
- Guaranteed minimum withdrawal benefit (GMWB): provides the contract holder a specified percentage of a guaranteed minimum amount that can be withdrawn annually until that guaranteed amount is depleted, regardless of the available account balance
- Guaranteed minimum withdrawal benefit for life (GMWBL): provides the contract holder a specified percentage of a guaranteed minimum amount that can be withdrawn annually for life, regardless of the available account balance
These GMXB features typically are market risk benefits that require fair value accounting under ASC 944. However, see IG 2.4.5 for discussion of the exception for insurance benefits in universal life-type contracts, and see IG 2.4.5 for discussion of the assessment of whether other-than-nominal capital market risk exists. IG 2.4.5 also provides further guidance on initial and subsequent measurements of market risk benefits in insurance and investment contracts.
2.4.5 Classification of market risk benefits
The market risk benefit (MRB) is an amount that a policyholder receives in addition to the account balance upon the occurrence of a specific event or circumstance, such as death, annuitization, or periodic withdrawal that involves protection from capital market risk.
ASC 944-40-25-25C introduces the term MRB.
A contract or contract feature that both provides protection to the contract holder from other-than-nominal capital market risk and exposes the insurance entity to other-than-nominal capital market risk shall be recognized as a market risk benefit.
Features that meet the definition of MRBs are accounted for at fair value. The portion of the fair value change attributable to a change in the instrument-specific credit risk of the written MRB is recognized in other comprehensive income and not in net income. MRB balances and changes in their measurement are presented separately in the statement of financial position and the statement of operations.
Market risk benefits can be present in variable and fixed annuity contracts and in certain life insurance contracts. ASC 944-40-25-25D (b) notes that an MRB does not include the death benefit component of a life insurance contract (i.e., the difference between the account balance and the death benefit amount). However, an MRB may be present in a life insurance contract if it provides for protection from capital market risk for other benefits, for example, a GMAB or GMWB on a variable universal life insurance contract. MRBs may also be present in universal life insurance contracts that provide for an option to settle the contract upon surrender or death with an annuity determined using guaranteed fixed interest rates.
As noted in IG 2.4.4.2 MRB features in contracts include GMXBs, such as GMDBs and GMIBs in annuity contracts, which were previously accounted for under a model that recognizes the cost of these features over the life of the contracts. MRB features also include GMABs and GMWBs previously accounted for as embedded derivatives, as well as GMWB for life benefits, for which there was previously diversity in accounting practice. For variable annuity contracts, the host contract will be measured excluding the separated features (including MRBs and any embedded derivatives) and may be further separated into different accounting units consistent with where the policyholder elected the funds to be invested (the separate accounts or the fixed account).
ASC 944-40-25-25D further establishes what is an MRB.
In evaluating whether a contract or contract feature meets the conditions in paragraph 944-40-25-25C, an insurance entity should consider that:
- Protection refers to the transfer of a loss in, or shortfall (that is, the difference between the account balance and the benefit amount) of, the contract holder’s account balance from the contract holder to the insurance entity, with such transfer exposing the insurance entity to capital market risk that would otherwise have been borne by the contract holder (or beneficiary).
- Protection does not include the death benefit component of a life insurance contract (that is, the difference between the account balance and the death benefit amount). This condition does not apply to an investment contract or an annuity contract (including an annuity contract classified as an insurance contract).
- A nominal risk, as explained in paragraph 944-20-15-21, is a risk of insignificant amount or a risk that has a remote probability of occurring. A market risk benefit is presumed to expose the insurance entity to other-than-nominal capital market risk if the benefit would vary more than an insignificant amount in response to capital market volatility.
ASC 944-40-25-25D(a) notes that protection refers to the transfer of a loss in, or shortfall of, the contract holder’s account balance and clarifies that “loss in, or shortfall of” is the difference between the account balance and the benefit amount. Despite the connotation of “loss in, or shortfall of” as protecting against a loss to the account balance, the consideration in ASC 944-40-25-25D(a) should include any difference between the account balance and the guaranteed benefit amount. The guaranteed benefit is an amount that a policyholder would receive in addition to the account balance upon the occurrence of a specific event or circumstance, such as death, annuitization, or periodic withdrawal. For example, a fixed-indexed annuity product that has a guaranteed minimum death benefit that pays a return that is two times the investment returns credited to the account balance is deemed to be providing “protection” to the policyholder’s account balance even though the account balance may not have incurred an investment loss.
The “death benefit component of a life insurance contract” exclusion in ASC 944-40-25-25D(b) is referencing the legal policy form of the contract (i.e., a life insurance contract rather than an annuity contract). It is not focusing on the accounting classification of the contract under ASC 944 (i.e., insurance contract or an investment contract). As such, the death benefit components of traditional universal life and variable life products are not considered MRBs.
Question IG 2-1 addresses whether health or disability riders on universal life contracts need to be assessed under the MRB guidance.
Question IG 2-1
Are other insurance benefits on life insurance contracts, such as health or disability riders, required to be assessed under the MRB guidance?
Are other insurance benefits on life insurance contracts, such as health or disability riders, required to be assessed under the MRB guidance?
PwC response
No. The death benefit exception in ASC 944-40-25-25D(b) explicitly refers to the legal policy form of the contract (i.e., a life insurance contract rather than an annuity contract) and explicitly states that the exception does not apply to an investment or annuity contract. While the exception does not explicitly include or exclude other types of insurance benefits, ASC 944-20-15-12 states that “universal disability contracts that have many of the same characteristics as universal life-type contracts, with the exception of providing disability benefits instead of life insurance benefits, shall be accounted for in a manner consistent with universal life-type contracts.” As a result, consistent with the death benefit exception, disability and health benefits features on universal life contracts are not required to be assessed under the MRB guidance.
A contract or contract feature is presumed to have other-than-nominal capital market risk if the cash flows related to the contract or contract feature will vary significantly in response to capital market volatility. Nominal risk is defined in ASC 944-20-15-21 as a “risk of insignificant amount or remote probability” of occurring. The FASB’s master glossary notes that capital market risk includes price, interest rate, and foreign exchange risk.
Question IG 2-2, Question IG 2-3, Question IG 2-4, Question IG 2-5, and Question IG 2-6 address the assessment of whether other-than-nominal capital market risk exists.
Question IG 2-2
When assessing for the existence of MRBs in a contract with multiple investment options (e.g., general account vs. separate account options), is the assessment performed before or after allocating the hybrid contract into discrete units of measurement based on the selected investment options?
When assessing for the existence of MRBs in a contract with multiple investment options (e.g., general account vs. separate account options), is the assessment performed before or after allocating the hybrid contract into discrete units of measurement based on the selected investment options?
PwC response
The assessment of the existence of an MRB is made at the contract level, before allocating the contract to its separate account and general account units of measurement.
Question IG 2-3
Is the assessment of whether MRBs exist performed at inception of a contract only, or may the conclusion be reassessed in future periods (e.g., if market conditions were to deteriorate)?
Is the assessment of whether MRBs exist performed at inception of a contract only, or may the conclusion be reassessed in future periods (e.g., if market conditions were to deteriorate)?
PwC response
The assessment can only be performed at initial recognition of the contract. ASC 944-40-25-25B(a), which addresses recognition of market risk benefits, states “An insurance entity shall first determine at contract inception whether such benefits should be accounted for under the provisions of paragraph 944-40-25-25C.”
Question IG 2-4
Should a policyholder’s ability to transfer funds between investment options or deposit new funds into their account balance be considered in the assessment of whether an MRB exists?
Should a policyholder’s ability to transfer funds between investment options or deposit new funds into their account balance be considered in the assessment of whether an MRB exists?
PwC response
Yes. In order to determine whether an other-than-nominal capital market risk exists, an entity must project the cash flows related to the contract or contract feature and assess the significance of the potential guaranteed payments compared to the account balance. Therefore, an entity should consider all contractual cash flows of the feature being assessed, including transfers or future deposits, in its determination of whether an MRB exists.
Question IG 2-5
Can probability of economic scenarios be considered in overcoming the presumption that a contract or contract feature has other-than-nominal capital market risk?
Can probability of economic scenarios be considered in overcoming the presumption that a contract or contract feature has other-than-nominal capital market risk?
PwC response
Yes. As discussed above, nominal risk is defined as a risk of insignificant amount or remote probability of occurring. A full range of capital market scenarios should be considered in determining whether the insurance entity is subject to and the contract holder is protected from other-than-nominal capital market risk, but may exclude certain capital market scenarios that have a remote probability of occurring. Entities should first determine whether significant losses exist within any of the economic scenarios. If no significant losses exist in any economic scenarios, the capital market risk would likely be deemed to be nominal (i.e., not an MRB). If significant losses exist, but only in economic scenarios that have a remote likelihood of occurring (e.g., in the tail scenarios in a stochastic scenario set or those scenarios which are highly unlikely to occur), the capital market risk could be deemed to be nominal. Where significant losses exist in economic scenarios that are not remote, including multiple scenarios that are in aggregate not remote, the contract or contract feature exposes the entity to other-than-nominal capital market risk. Some companies may exclude scenarios they have determined to be highly unlikely in their models. The assessment of what is remote requires judgment, however, a full set of scenarios (both modeled and not modeled) must be considered in the assessment.
Question IG 2-6 discusses how to consider contract holder utilization in the analysis of an MRB.
Question IG 2-6
Can expected contract holder utilization or mortality (i.e., incidence or likelihood of contract holder election of a feature or death) be factored into the analysis of determining if an MRB exists (i.e., in assessing whether the insurance entity is subject to/contract holder is protected from other-than-nominal capital market risk)?
Can expected contract holder utilization or mortality (i.e., incidence or likelihood of contract holder election of a feature or death) be factored into the analysis of determining if an MRB exists (i.e., in assessing whether the insurance entity is subject to/contract holder is protected from other-than-nominal capital market risk)?
PwC response
No. The assessment as “other than nominal” is performed as if the contract holder elected the benefit (for annuitization guarantees) or died (for death benefits) and thus the criterion of “more than a remote probability of occurring” excludes expectations of contract holder behavior or death. That is, the fact that contract holder election or death is remote does not impact the assessment of whether the market risk benefit, if elected or triggered by death, could be significant. However, if the annuitization or death benefit is determined to be an MRB, the expected contract holder utilization and mortality should be considered in the determination of the fair value of the feature as market participants would consider these assumptions.
Question IG 2-7 discusses if two-tier annuities should be assessed as MRBs.
Question IG 2-7
Should two-tier annuity contracts be assessed under the MRB guidance in ASC 944-40-25-25C and ASC 944-40-25-25D?
Should two-tier annuity contracts be assessed under the MRB guidance in ASC 944-40-25-25C and ASC 944-40-25-25D?
PwC response
Yes. Two-tiered annuities provide potential benefits in addition to the account balance that are payable only upon annuitization. Two-tier annuities are required to be assessed under the MRB guidance. ASC 944-40-35-20 states that for two-tier annuities, an additional liability recognized in accordance with ASC 944-40-25-26 through ASC 944-40-25-27 or a market risk benefit, as applicable, should be recognized during the accumulation phase for the benefit in excess of the accrued account balance. A two-tier annuity that contains a feature that both provides protection to the contract holder from other-than-nominal capital market risk and exposes the insurance entity to other-than-nominal capital market risk is recognized as a market risk benefit.
2.4.5.1 Reinsurance contracts in scope of MRBs
Market risk benefits can be present in contracts written by both insurance and reinsurance entities. A reinsurance entity may assume all or a portion of market risk benefits associated with various GMXB features. ASC 944-40-25-40 clarifies that both the assuming reinsurance entity and the ceding entity are subject to the MRB guidance. The account balance for purposes of the assessment of whether the reinsurance contract is or contains an MRB in accordance with ASC 944-40-25-25D refers to the underlying contract between the direct insurance entity and the contract holder. Refer to IG 9.8 for additional considerations regarding the reinsurance of market risk benefits.
2.4.5.2 Classification of MRB – interaction with ASC 815 and other guidance
ASC 944-40-25-25B provides the order of analysis when assessing contract features that provide potential benefits in addition to the account balance to determine whether the additional benefits are MRBs, derivatives or embedded derivatives, or additional annuitization, death, or other insurance benefits.
Classification is important due to the differences in measurement between the models. Like derivatives, MRBs are recorded at fair value. However, under derivative accounting, the entire change in fair value is recorded through income, whereas for MRBs, the portion of the change in the value due to changes in instrument-specific credit risk is recognized in OCI. The application of the MRB guidance may result in a feature that was previously recognized as a derivative now being recognized as an MRB. In addition, certain contractual features may have capital market risk, such as interest rate risk, but may not meet the definition of either an MRB or a derivative because the features are not an amount in addition to the account balance (e.g., a variable interest rate return on a fixed annuity or universal life account balance) or they may be life insurance benefits in a life insurance contract.
The scope exception guidance in ASC 815-10-15-13, which indicates contracts not subject to the derivative guidance in ASC 815, has been expanded to include market risk benefits in addition to the existing exclusion for insurance contracts.
Figure IG 2-1 Part C provides a decision tree for determining the accounting model for contract features in insurance and investment contracts that provide potential benefits in addition to the account balance, as detailed in ASC 944-40-25-25B.
2.4.5.3 Classification of MRB - types of market risk benefits
Periodic interest crediting features applied to account balances are not considered MRBs. This includes features in which the interest crediting is directly or indirectly linked to the performance of an underlying portfolio of investments or an equity index (e.g., variable annuities and universal life) and those for which there is a guaranteed minimum interest crediting rate on the account balance (e.g., deferred fixed annuities). The interest crediting features on an account balance do not provide a benefit to the contract holder in addition to the account balance, but instead are defining the return provided on the account balance. The interest crediting feature simply provides that the policyholder account balance will be credited with a return that can be positive, negative, or zero depending on the crediting feature. For certain products, such as fixed-indexed annuities with interest crediting rates linked to an equity index, the interest crediting feature of the contract is not considered an MRB and will continue to be accounted for as embedded derivatives under ASC 815.
A traditional annuitization guarantee in a deferred annuity product (i.e., contract specifies the mortality table and the interest rate to be used to determine future annuity payments using the account balance as the base) is an MRB if the insurance entity is exposed to other-than-nominal capital market risk. The feature is providing “protection” from the difference between the periodic payment promised by the annuitization guarantee and the account balance and is economically similar to a variable annuity with a GMIB. However, if the annuitization guarantee only locks in the mortality table, but the interest rate to be used to calculate the annuitization payments will be based on market rates at the future annuitization date, there is no MRB feature because the contract holder is not protected from capital market risk.
Figure IG 2-2 provides examples of some common products issued by insurance and reinsurance entities that may have features with capital market risk and analyzes whether such contract features would meet the definition of an MRB.
Figure IG 2-2
Analysis of MRB for common products and features for market risk benefit accounting
Analysis of MRB for common products and features for market risk benefit accounting
Base product |
Benefit feature |
Benefit feature previous accounting model |
Market risk benefit under ASC 944-40-25-25C and 25D? (if no, follow previous accounting model) |
|---|---|---|---|
Annuity contracts
|
|||
Fixed annuity
|
Interest crediting rate on the account balance at the discretion of the insurance entity that is often indirectly based on return on unspecified general account assets with a contractually-specified guaranteed minimum interest crediting rate
|
No. The interest crediting feature is not providing a potential benefit in addition to the account balance.
|
|
Fixed annuity-market value adjusted annuity
|
The contract provides for a return of principal plus a fixed rate of return if held to maturity, or alternatively, a market-adjusted value if the surrender option is exercised by the contract holder before maturity. The market-adjusted value is typically based on current interest crediting rates being offered for new market value annuity purchases.
|
No. The surrender feature is not providing a potential benefit in addition to the account balance. Amount received upon surrender is account balance adjusted for interest rate changes; contract holder is in effect absorbing capital market risk rather than being protected from it.
|
|
Fixed-indexed annuity (FIA)/ Equity-indexed annuity (EIA)
|
Interest crediting rate on the account balance is based on performance of an equity index (e.g., S&P 500) with a contractually-specified minimum interest crediting rate
|
The equity index crediting is part of the account balance and is an embedded derivative.
|
|
Variable-indexed annuity
|
Interest crediting rate on the account balance based on performance of an equity index (e.g., S&P 500). Interest crediting rate may be negative and may have a "buffer" in which the insurance entity absorbs certain downside risk (e.g., first 10% loss) with remaining risk with contract holder.
|
The analysis is the same as the preceding product; it depends on the termination provisions of the contract.
|
|
Fixed-indexed annuity (FIA)/ Equity-indexed annuity (EIA)/ Variable-indexed annuity
|
GMXBs (i.e., GMDB, GMIB, GMAB, GMWB, GMWB for life)
|
Yes. These guarantee features are providing a potential benefit in addition to the account balance for difference between the guaranteed benefit and the account balance.
|
|
Deferred fixed annuity
|
Annuitization guarantee provides calculation of annuitization periodic payments based on guaranteed minimum interest rate as described in ASC 815-15-55-58.
|
Yes, if the risk is other-than-nominal at inception; expected utilization is not considered when making the assessment. The guarantee feature is providing a potential benefit in addition to the account balance for the difference between the guaranteed benefit (i.e., periodic payments promised by the annuitization guarantee) and the periodic payments using current interest rates.
|
|
Deferred variable annuity
|
Interest crediting rate on the account balance is equal to investment returns from designated investment funds.
|
No. The interest crediting feature is not providing a potential benefit in addition to the account balance.
|
|
Deferred variable annuity with GMXBs, reinsurance of GMXB features
|
GMXBs (i.e., GMDB, GMIB, GMAB, GMWB, GMWB for life)
|
Yes. These guarantee features are providing protection to the contract holder (or cedant) for the difference between the guaranteed benefit and the account balance.
|
|
Life insurance products
|
|||
Universal life
|
Interest crediting rate on the account balance at the discretion of the insurance entity, often indirectly based on return on unspecified general account assets. Contract may or may not provide guaranteed minimum interest crediting rate.
|
No. The interest crediting feature is not providing a potential benefit in addition to the account balance.
|
|
Universal life
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A no lapse guarantee/universal life secondary guarantee, where the death benefit remains in force even if the account balance is insufficient to pay the cost of insurance assuming minimum funding requirements are met.
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No. The death benefit component of a life insurance product is excluded from the scope of the MRB guidance.
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Universal life
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Interest crediting rate on the account balance is based on performance of an equity index (e.g., S&P 500).
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It depends on the termination provisions of the contract. If the equity index crediting earned to date is available upon surrender at any time, the equity index crediting is part of the account balance and is an embedded derivative.
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Universal life
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Death benefit is based on the performance of an equity index.
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No. The death benefit component of a life insurance product is excluded from the scope of the MRB guidance.
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Universal life
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An option to settle the contract upon surrender or death with an annuity determined using guaranteed fixed interest rates.
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Yes. The annuitization option is providing protection for the difference between the guaranteed benefit and the account balance.
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Variable universal life
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Interest crediting rate on the account balance is equal to investment returns from designated investment funds.
Upon death, in one version of the product, the policyholder receives the greater of account balance and fixed death benefit; in another version, the policyholder receives the account balance plus the fixed death benefit.
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No. The interest crediting component does not provide a potential benefit in addition to the account balance.
No. The death benefit component of a life insurance product is excluded from the scope of the MRB guidance.
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Variable universal life
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Benefits other than death benefits, for example, a GMAB or GMWB on the account balance component
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Yes. The benefit is providing protection for the difference between the guaranteed benefit and the account balance.
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2.4.6 Classification of participating life insurance contracts
Participating life insurance contracts include certain contracts issued by mutual life insurance entities and certain stock life insurance entities that have both of the following characteristics, as described in ASC 944-20-15-3.
Participating life insurance contracts denote those that have both of the following characteristics:
- They are long-duration participating contracts that are expected to pay dividends to policyholders based on actual experience of the insurance entity.
- Annual policyholder dividends are paid in a manner that both:Identifies divisible surplusDistributes that surplus in approximately the same proportion as the contracts are considered to have contributed to divisible surplus (commonly referred to in the actuarial literature as the contribution principle).
a) Identifies divisible surplus
b) Distributes that surplus in approximately the same proportion as the contracts are considered to have contributed to divisible surplus (commonly referred to in the actuarial literature as the contribution principle).
The participating insurance contract accounting model is viewed as a hybrid of the traditional long-duration and universal life-type models:
- Premium revenue is recognized when due.
- A liability for future policyholder benefits is recorded as the present value of estimated future policy benefits and related expenses less the present value of estimated future net premiums (benefits and related expenses) using locked-in assumptions, along with a terminal dividend liability, when applicable.
- Unlike the traditional model, mortality and discount rates used to calculate the liability for future policy benefits are based on contractual terms and are not related to actual or anticipated experience. In this way, the liability for future policyholder benefits is meant to be a proxy for the universal life-type contract account balance liability, as participating life insurance contracts typically do not have a stated account balance.
- Annual dividends are accrued as a policyholder expense as declared.
- Eligible deferred acquisition costs are capitalized and amortized on a straight-line basis over the expected term of the related contracts.
Some participating contracts were isolated for regulatory cash flow purposes when mutual life insurers demutualized. This isolation structure is called a “closed block.” ASC 944-805 provides guidance on the specialized accounting for demutualization and closed block transactions.
In accordance with ASC 944-20-15-28, limited-payment participating contracts that are not in substance universal life-type contracts are classified as limited-payment contracts (i.e., not participating contracts).
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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